Banking on the iMac

Apple is banking on its new
translucent greenish computer, the iMac, to spur its turnaround efforts.

The computer maker has already shown it can keep a lid on expenses and pull
itself into the black. But Wall Street repeatedly has said they want
year-over-year revenue growth before declaring the company a turnaround
success.

The question is can the
iMac be the revenue driver and the key to Apple
making its turnaround complete?

Analysts say the iMac may not be Apple's silver bullet.

"The iMac is an important mission for Apple, but it's not driving the whole
company," said Lou Mazzucchelli, an analyst with Gerard Klauer Mattison.

And Richard Schutte, an analyst with Goldman
Sachs, said the iMac is expected to pull down Apple's average selling
price, or ASPs.

"I don't doubt the iMac's unit shipments will be a success, but I doubt it
will be a financial success because the iMac's ASPs are 30 to 40 percent
lower than Apple's ASPs, so their shipments will have to be 30 percent
higher just to be level."

Though lower hardware component costs can offset this somewhat, Schutte
added that without the iMacs, Apple's average selling prices would probably
hold up better and the company could afford to sell fewer units to make the
same amount of revenues.

Sources estimated that Apple's average selling price for the iMac is

Shipments of Apple computers

Year

Quarter

Units shipped

1997

Q4

652,000 total

1998

Q4*

740,000 total / 250,000 iMacs

1999

Q1*

914,400 total / 525,000 iMacs

Source: News.com research and industry analysts
*projection

between $1,100 to $1,150 a unit. The suggested retail price is $1,299.

Schutte estimates that Apple will sell roughly 740,000 units overall in its
fiscal fourth quarter that ends in September, of which iMacs are expected
to account for a third, or 250,000 units. The overall unit growth is
expected to increase more than 14 percent in the quarter over the previous
year, but he expects revenues to fall to $1.48 billion in the quarter, down
from year ago figures of $1.61 billion.

Kurt King, an analyst with Montgomery
Securities, said Apple has previously indicated that it does not expect
to post year-over-year revenue in the fiscal fourth quarter, but it
anticipates such growth in the following fiscal first quarter.

Meanwhile, Charles Wolf, an analyst with Credit Suisse First Boston, said Apple's
move out of the printer business is contributing to the drop in comparable
periods for the company's revenues.

Wolf added that he has an aggressive forecast for the company's fiscal
first quarter that ends in December. He estimates the company revenues will
increase 30 percent over year-ago figures. And he noted that unit shipments
will rise 67 percent over that period, with iMac sales reaching 425,000
units in the first quarter to the consumer market, and another 125,000
units to Apple's core education market.

And while some complain the iMac is too expensive for the consumer market,
several Wall Street analysts said they think the price tag will not deter
sales, given that the unit comes with an attached monitor. Analysts said
they're more concerned that the lower than usual price for an Apple product
will hurt the company's overall profits.

"Apple's gross margins were 25.7 percent overall last quarter, and the
company has cautioned us that they'll come down because [of the
iMacs]," said Jimmy Johnson, an analyst with AG Edwards.

Analysts largely expect the iMac to have gross margins of around 20
percent, despite the recent fall of component prices that are used inside
the computers.

"The profit margins for the iMac are lower than other new Apple products,"
Wolf said. "The G3 series, which is sold to business customers and
professionals, had profit margins that were in the mid-20s."

But Apple is willing to live with lower ASPs and gross margins, in order to
compete as it re-enters the consumer space.

Resellers are reporting a mixed bag on how their margins are expected to do
with Apple's iMac pricing. One noted that his firm is having to throw in
additional software and memory--leaving only a profit of $10 off each
unit--while another said it's inline with the high single-digit margins
that resellers typically receive.

Meanwhile, analysts said challenges Apple faces with its iMacs include
possible cannibalization of its other products and uncertainty whether it
will attract new users and defectors from the Windows-Intel camp.

"Apple's G3s, [which carries a higher sales price and margins], is
coming off a healthy cycle," Schutte said. "But if someone buys an iMac,
would they have bought a G3 if there was no other alternative?"

He added buyers of the iMac will likely come from Apple's installed base
of customers, but no data will be available whether the company is growing
its market share with new customers and defectors from its competitor.

As consumers start to get their hands on iMacs this Saturday, questions of
sustainable demand will not likely emerge until Apple's second quarter that
ends in March. That's because iMacs will be available for only half of the
company's fiscal fourth quarter and the holiday season will inflate figures
in the first quarter, analysts said.